Tuesday, December 21, 2004

Negotiation, Scott Boras Style -- Part I:
Bucking an Industry's Gravitational Field  

In a recent entry, I discussed player agent Scott Boras marketing his clients the most aggressive way he can, all the time. I guess it's just the season for Scott Boras, not exactly The Prince of Peace in his profession. Boras is successful as a baseball player agent, while being entirely different in the approach he takes from all the other baseball player agents I know about. All the rest make use of the natural gravitational field inherent in a system that is mostly closed (30 teams, 750 big-league roster spots)

In a closed system like baseball (or other industries with few competitors, such as automobile manufacturing or integrated oil companies, or postage-meter machine makers or overnight delivery services or industries where groupthink is very strong, such as commercial book publishing) competition may be fierce, but everyone tends to know everyone else. If you sold Ford brake sub-assemblies, for example, and they were sub-standard, you could still market your product to Chrysler or G.M., but they'd know all about you, maybe more than you knew about yourself. If, as a book agent, you did a magnificent job negotiating a giant advance for your author of a book that tanked, that publisher, and many others who knew editors at that house, might look upon you and your clients' work with a little disfavor, putting you at a competitive disadvantage.

These are pretty closed systems and there's a natural evolution in closed systems like these to favor buyers a little over sellers, and to get clannish, and for sellers' agents to become almost neutral parties instead of seller's advocates.

The clannish industry model agent will, to varying degrees, still be focused on giving really fine customer service. The ambiguity that will undermine that agent is: ┬┐Who is her customer -- seller or buyer?

To continue doing business, the agent does need to make a good deal for the client, but at the same time, he needs to be very delicate about not eroding the interests of the buyer either, because that could affect how easy it is to make the next 60 deals. Players (book authors, etc.) have short careers that occupy only a small proportion of any individual team's (publisher's, etc.) budget during the life of that career. And agent's career can go on a longer time.

So it's a natural gravitational field that tugs baseball player agents towards long-term thinking (meaning the party across the table is almost as much of a customer as the client). The standard model for the agent is to defend her client's interests, but only to the degree that it doesn't reduce her ability to negotiate many subsequent deals easily with the buyer. Too much success in extracting money from closed system buyers erodes the seller's agent's ability to go back to that buyer and any other buyers who share clan ties with that buyer.

If you're inclined to view things mathematically, imagine a system where the standard deal is $4 MM and your take is 5% as an agent. You cleverly negotiate a $9 MM deal for your client (let's call him Charlie Maxwell), who really performs like a $4 MM or even $5 MM player. Players view you as a genius at first. But you erode your ability to negotiate for your other clients, not only with that specific team (they have more of their designated budget already invested in your other client), but with other teams, too, who might be concerned about getting taken while in a negotiation with you. You might get stuck with middle-of-the-road players who, because they don't get signed early in the cycle, don't get as much money because demand for medium players is rarely hysterical, and other, presumed to be easier to sign medium players are snapped up, reducing demand. Your next $4 MM player might have carry the burden of anxiety waiting to the last minuet to get his deal, or perhaps have to settle for $2.5 MM. So the norm is to smooth edgy bargaining in the interests of simplifying the agent's task and the buyer's task.

It's not the pure Schumpeter form of market many young business people imagine is the norm when they get their MBAs. This clannish system is far more prevalent than most know.

The standard business model for agents is helping the client, but not too much, especially if they plan to stay in the business for a while. It strips out some of the fear buyers have, which eases and speeds negotiation, and perhaps makes them willing to occasionally cut the agent some slack during a tough negotiation because of some past yielding on the agent's part.

So, to some degree, the player-agent part of the equation is primarily closed market. There are a stable of steady agents, a few who come and go. But the survivors mostly operate within the clannish social structure.

And what happens when the norm is deals that appear to the sellers as "sweetheart deals" or "company union" arrangement? Dissatisfaction, a sense that their not getting the respect they merit, or perhaps just that there's money left on the table.

It opens up an opportunity for some agent who chooses to operate differently. Someone who ties self-interest directly to the seller and not at all to the buyer. This will attract sellers who weigh the short-term benefits against the longer ones (just as the agent does on first blush) to sign up.

So you can see the obvious limiting factor to this, the Boras take-no-prisoners model...

Your medium players are at a comparative disadvantage to other agents' medium players because teams would rather deal with other, more clannish, agents.

So to make this work, not only do you have to get players to want to come to you for representation, you need to get really fine, exceptional players to come to you. According to this Denver Post article pointed out by Baseball Think Factory's Baseball Primer:

Once a good-hitting, defensively challenged infielder, Boras was at Double-A in 1978 when he gave up the dream.

His mediocrity as a performer, however, may have led to a preoccupation with the game's greatest players. There are 750 major-league players, yet Boras limits his stash to about 65. Each is an enormous star, such as Alex Rodriguez and Beltran; or once had the potential to become a star, such as St. Louis' Rick Ankiel or the Rockies' oft-injured Jason Young; or was a former star, such as Rockies catcher Charles Johnson.

"We're selective," Boras said. "We're not for everybody. And not everybody's for us. We're looking obviously for the most skilled players. And we're looking for discipline and players who want to take information and want to improve themselves."

He has been able to draw many of the most talented, business-aggressive players because he's known for unleashing market-busting deals (like Alex Rodriguez' reported 10-year quarter-of-a-bmillion dollar deal with the Texas Rangers back in 2000). Players who equate respect with relative pay gravitate to Boras because he can deliver. And what tactics does he use? The Post story also says:

"When you have multiple premium free agents, you can control the timing of the offseason," former New York Mets general manager Steve Phillips said. "The one thing he has started to do is he is declaring what the market is before the market plays out. {SNIP}

"We have a system," commissioner Bud Selig said. "As long as people operate within that system, the legalities of it, then there's no problem. Other than that, I never comment on any particular agent. I don't think it's fair for me to do so."

Boras said he has never met with Selig despite numerous invitations from the commissioner. No need to hear Selig's spiel on the impoverished state of baseball when Boras already has secured the financial statements. Every so often, baseball will send out a release trumpeting a new deal with XM radio, or a website or MasterCard.

Media outlets dismiss most of these announcements as propaganda, but Boras recognizes the news value. He will call down to his Dragon's Lair with orders to ferret out the fresh additions to baseball's central fund. As baseball's chest puffs like pastry, Boras prepares to slice into a larger pie.

And better believe when he pitches his clients to ownership groups, Boras' notebooks will include data on how big that baseball pie has become.

"Scott is extremely bright. Extremely prepared and thorough. Very determined," Rockies general manager Dan O'Dowd said. "But some of the numbers he comes up with are a little miscalculated."

But Boras is armed with these indisputable facts: MLB's revenues have increased 28 percent from $3.2 billion in 2000 to $4.1 billion this year. Meanwhile the richest contract for a top free agent has plummeted 71.4 percent from A-Rod's $252 million in 2000 to Miguel Tejada's $72 million last winter.

"You say there's been a market correction," Boras said. "When you look at these numbers, the market correction says what?"

Know what infuriates owners about Boras? He's right. More than once, Selig's men learned Boras knew the collective bargaining agreement better than they did. It was Boras who turned the amateur draft upside down. In 1964, the year before baseball implemented the draft, Mantle and Mays were drawing $125,000 salaries while the Los Angeles Angels signed a kid named Rick Reichert to a $205,000 bonus.

Staggered, baseball welcomed its draft in 1965 by unilaterally capping signing bonuses. Rick Monday became baseball's first draft pick, and his reward was a 50 percent cut. Reichert's bonus remained a record for 18 years, when Darryl Strawberry received $210,000 in 1982. Boras, equipped with a law degree from the University of the Pacific, represented his first clients in 1983. He began to use another year of college or the Independent League as holdout leverage. He got Ben McDonald the first $1 million signing bonus in 1989. He stunned the industry by getting Brien Taylor a record $1.55 million bonus from the Yankees in 1991. Boras used a 15-day deadline to tender draft picks a contract - a formality clubs considered a waste of time - to turn Travis Lee and Matt Anderson into $10 million free agents.

As for established big-league players, Boras' impact on the free-agent market is undeniable. In a two-year span, he negotiated baseball's first $100 million contract for Kevin Brown and first $250 million deal for Rodriguez when no other player before or since reached $200 million.

So Boras doesn't play by the clannish rules while almost all his competition does. By being as relentless in gathering and analyzing knowledge as he is with his negotiation style, he has the ability to play a different strategy. He can play his alternate strategy in way that is successful in the short-term and without him having to advertise or go out and beat the bushes for new recruits. That strategy creates marketing pull attracting other players looking for the most aggressive agent they can find, providing him more chances to play his strategy.

It appears he does one more thing worth pointing out.

While most agents negotiation involve just one player at a time, Boras will bundle negotiations, forcing teams to consider multiple clients or even, I've read, put pressure on teams to put pressure on other teams to sign Boras clients.

If you're the agent for sellers that constitute a significant chunk of the market for quality, you can try to act as a cartel. And remember, he knows he doesn't need the whole market to buy into his plan, just one team for each player he represents. He's not selling commodities -- in this industry, like many others outside baseball, the talent is the product.

More endeavors are like baseball, clannish, fairly-closed systems, than economists like to admit.

There are advantages to the standard approach sellers take -- it simplifies the process, lowers the overhead inherent in negotiation. But the more the market is dominated by a standard approach, the higher the returns for a competitor to take a wildly different approach, especially if that competitor can offer quality as the differentiator. If quality is not the differentiator, the equation shifts to the buyer's favor -- because while they might not like dealing with the seller's aggresive agent, they need the cream of the talent to win the game. No quality, no need to go to the deviant strategy guy for mid-range talent they can buy with lower overhead and at a lower price.

Keep your eyes peeled for contrarian strategies. The more uniform the "standard" approach, the harder it is to find the exact right wedge, but the higher the returns when you do.

In the next entry, I'll discuss the other aspect of Boras' negotiation approach useful to managers outside of baseball.

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